Future Proofing Your Debt Book

The U.S. commercial real estate sector is bracing for an unprecedented wave of debt maturities. This situation, often described as a “wall of maturities,” highlights a critical challenge facing fund managers and lenders alike. The era of persistently low interest rates has ended, and the rapid increase in rates has caught many by surprise. As a result, legacy lenders, who have traditionally been the go-to for refinancing and new loans, find themselves constrained by risk factors, unable to meet the burgeoning demand for debt refinancing ­– and both fund managers and property owners suffer the consequences.

 

Understanding the Debt Challenge

Historically, real estate in the U.S. has been predominantly financed through debt rather than equity. For decades, property owners benefited from declining interest rates, which allowed them to refinance their debts at lower costs, thereby increasing the value of their properties and extracting equity. This trend has reversed dramatically in recent years. Interest rates have spiked from nearly zero to around 7%, drastically altering the refinancing landscape.

Many property owners are now faced with the reality that their buildings are not generating sufficient income to meet new debt service requirements. Instead of withdrawing equity during refinancing, they are often required to inject additional capital to cover the gap created by higher interest rates and lower property values. This situation is particularly acute for office and retail properties, which have been hit hard by changing market dynamics and reduced occupancy rates.

 

The Role of New Lenders

As traditional banks tighten their lending practices, unable to extend new loans due to regulatory and risk constraints, a new breed of private lenders has emerged. These new entrants, ranging from private equity firms to specialized debt funds, are seizing the opportunity to offer flexible financing options to property owners. Unlike traditional bank loans, which are often fixed rate, these new debt instruments tend to be floating rate, adjusting in line with market interest rates. This means that while they may offer a solution for refinancing in the short term, they also introduce a higher degree of uncertainty regarding future debt servicing costs.

But these new lenders often operate with stringent terms. They require significant equity buffers and are quick to take possession of properties if borrowers default, often acquiring them at a discount. This approach allows them to achieve equity-like returns while maintaining a relatively secure investment position.

 

The Impact on Real Estate Investors

For real estate investors, the shift in the lending landscape presents both challenges and opportunities. The immediate challenge is the need to adapt to higher borrowing costs and tighter financing conditions. Investors must carefully manage their debt portfolios, ensuring that they are not overly exposed to interest rate risks and that they have sufficient cash reserves to meet any unexpected increases in debt servicing costs.

On the opportunity side, the influx of new lenders means that there are now more options for financing than ever before. This increased competition can drive down borrowing costs and provide more flexible terms for borrowers who are willing to shop around and negotiate aggressively. However, investors must be thorough in their due diligence, ensuring that they understand the full implications of the terms offered by these new lenders.

 

Sustainability is Risk Management

Regardless of what the future holds, sustainability is always a sound investment, as it not only increases value but also mitigates risk.

If your fund is facing a large number of debt maturities, you can work with EVORA to develop a sustainability strategy that preserves or enhances the value of your assets, making them more attractive to lenders and investors. By improving the performance of the properties in your portfolio, you can secure better refinancing terms and potentially reduce borrowing costs.

Utilizing our unique expertise and tools, EVORA can support fund managers through…

 

1. Comprehensive Data Management

EVORA’s data platform helps fund managers gather, validate, and manage large amounts of sustainability data efficiently. This tool simplifies the collection of data from various sources, ensuring that fund managers have accurate and reliable information at their fingertips. This is crucial for making informed decisions about refinancing and managing assets effectively during periods of debt maturity​. Track the performance of different properties, identify which assets are underperforming, and determine where additional funds might be needed to meet upcoming debt repayments. This enables you to allocate resources efficiently and avoid potential defaults.

 

2. Strategic Consulting and Customized Action Plans

EVORA provides strategic consulting to help fund managers integrate sustainability into their investment processes. This includes developing action plans to improve sustainability performance and ensure compliance with regulatory requirements like the Sustainable Finance Disclosure Regulation (SFDR)​.

EVORA provides tailored action plans for each asset, ensuring that fund managers can effectively address sustainability challenges and opportunities. These plans help in monitoring progress, managing costs, and ensuring compliance with various regulations​. This proactive approach can help reduce operating costs, improve asset values, and ensure that properties are well-positioned for refinancing.

 

3. Risk Management and Reporting

EVORA offers extensive risk management services that include the development of tailored ESG strategies and reporting solutions. Our expertise helps fund managers evaluate and mitigate risks associated with debt maturities by creating detailed reports that demonstrate the financial and sustainability performance of their portfolios. These reports can be used to reassure investors and stakeholders about the stability and long-term value of the fund’s assets, making it easier to negotiate new loans or refinancing terms.

 

4. Support for Green Financing

EVORA assists fund managers in accessing green financing options, which can offer more favorable terms than traditional loans. We help managers evaluate and apply for green loans and other sustainable finance instruments that align with your sustainability goals​. Leverage EVORA’s expertise to secure green loans for properties that meet certain environmental standards – this not only helps in managing current debt but also positions your fund as a leader in sustainable investments, attracting more environmentally conscious investors.

 

We’re Here to Help

At EVORA Global, we support real asset investors to establish sustainable investment strategies so that fund managers can navigate the complexities of a “wall of maturities” with confidence. Our comprehensive services, from advanced data management to strategic consulting, provide the tools and insights needed to manage debt effectively and position funds for long-term success.

As the integration of sustainability in the debt market matures, we are committed to helping our clients, and the broader industry, develop best-in-class strategies and processes to remain at the forefront of the moment.